CFA Level I · CFA Level I Exam · Fixed-Income Markets for Government Issuers
A sovereign issuer sells bonds denominated in its own domestic currency and has a floating exchange rate and its own central bank. Compared with an otherwise similar sovereign that borrows mainly in a foreign currency, the domestic-currency issuer is most likely to have:
The domestic-currency issuer most likely has lower credit risk, because it can levy taxes and its central bank can supply the currency needed to pay its debt. A foreign-currency borrower must obtain that currency elsewhere, so its default risk is typically higher.
- Alower credit risk because it can create domestic currency to meet obligationsCorrect
- Bhigher credit risk because it cannot raise taxes to repay
- Cidentical credit risk because currency of issue is irrelevant
Explanation
A sovereign that borrows in its own currency can raise taxes and, through its central bank, supply domestic currency to service debt. This lowers default risk, though inflation risk may rise. Foreign-currency borrowers must obtain that currency from exports or reserves, so the claim that currency of issue is irrelevant is wrong.
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